Wednesday, February 17, 2010

The article written by Robert Lea, David Robertson and Miles Costello included the following quote regarding possible 'white knights' to beleagured VT Group (although leading with Lockheed Martin), "VT counterbidders could be Boeing, the American aerospace group, and Thales and Finmeccanica, the European defence companies."

Whilst an impressive enough group, just which one would want to purchase a VT Group minus its naval shipbuilding business in 2010 ? The American contractors no doubt could find the resources to purchase the company but what shareholder rationale would be justifiable ? VT may have businesses in the US defense realm, but whilst substantial from a UK perspective they are most definitely a small, niche player by US standards.

Lockheed Martin would be keen to access VT's flight training contract with RAF, plus there could be a vague synergy between nuclear support services and LM's position with the nuclear deterrent - however to buy the entire company and divest the businesses not core to LM would be somewhat nonesensical from a shareholder standpoint - plus the company has bigger fish to fry in the USA concerning potential exposure to some$600m in penalties from the JSF program.

Boeing seems a little illogical to throw into the mix of potential counter bidders - in the UK, Boeing had no real defence presence until a few years ago when it was informally suggested by MINDES Lord Drayson, and was focused on the FRES land systems program - no real fit - plus given the focus on Dreamliner and the C-17 program would Boeing want to be seen to be investing time and resource into buying an education business ?

On the European front had this scenario come to pass a few years ago you could imagine Thales being keen to make the play. The company's high-water mark with the UK Ministry of Defence was around 5 years ago when Thales upstaged BAE Systems in the battle for the CVF aircraft carrier program. Since then reputations have waned as price has driven much of MOD commercial activity plus pressure from the major player in the UK. VT having divested itself of the shipbuilding business (and therefore a rationale to get back into the aircraft carrier programm proper) diminishes Thales interest beyond the specialist communications business of VT in the UK.

Finmeccanica has been on a purchasing spree in recent years, of which the Augusta-Westland helicopter acquisition was most politically visible. Whilst one could never rule out Italian corporate impulsiveness the support services business is not the same as new build of defence equiupment and therefore creates difficulty articulating a sound rationale for acquiring the business.

In summary, the idea of a white knight is always a good ploy ahead of a real negotiation concerning take-down price however for VT Group management finding a real white knight may squander valuable whilst institutional shareholders are re-running their financial models as to the benefits to them of a Babcock International Group acquisition. The story of merging VT training assets and nuclear support services under a strong Babcock management remains compelling at this time.